Who's right about the future? Stock or Bond market?

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garlandwhizzer
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Who's right about the future? Stock or Bond market?

Post by garlandwhizzer »

Stocks have re-traced over 60+% of their losses in this bear market. Stocks rose almost as quickly as the sudden drastic decline itself. Equity markets are a forward discounting mechanism and it seems to be telling us that in 6 - 12 months both the equity market and the economy are going to be much stronger than today, getting back much closer to "normal." The stock market surge seems IMO to be driven FOMO (fear of missing out) on the next the bull market which some believe has already started. The bond market on the other hand is trading at levels that suggest a very dim view of the economic growth future and little or no inflation for decades.

FED policy can control short term interest rates, but not long term rates. Long term rates are based on bond market investor's perceptions of long term economic growth and long term inflation. The lowest long term rates in history which we have now suggests that bond investors expect very muted economic growth and little or no inflation for multiple decades. The recent and current demand for 30 year Treasuries has driven their rates from low to ridiculously low at present (1.43%), levels that have never been seen before. So equity investors are rushing to get in on the next bull market while bond investors seem to be preparing for what happened to Japan starting in 1990 and lasting 30 years. Who's right?

Perhaps both are to some degree. Bond investors are preparing for a stagnant economic future with possible negative rates while stock investors are figuring that even if inflation and economic growth remain low for decades, stocks will still outperform bonds long term. Currently the S&P 500 yields more than a half percent higher than the 30 year Treasury and both are considerably lower than their long term average yields. I don't think the fabulous long term backtesting results for a 60/40 portfolio are going to replay quite as well for future expected returns. Hope I'm wrong.

Garland Whizzer
yohac
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Re: Who's right about the future? Stock or Bond market?

Post by yohac »

My worthless opinion is that the S&P 500 should not be higher than last October, when the unemployment rate was 3.6% and there was no pandemic. Yet here we are. Perhaps people are betting that the government simply won't allow the market to crash. In which case, earnings don't really matter and yes, FOMO takes total control.
2pedals
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Re: Who's right about the future? Stock or Bond market?

Post by 2pedals »

Who is right? Either one, a little of both or nobody, I can't say. I wouldn't try too hard measuring to speculate, the future is unknown. If you are uncomfortable maybe you need to secure an income stream and/or buy an immediate annuity.
whereskyle
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Re: Who's right about the future? Stock or Bond market?

Post by whereskyle »

yohac wrote: Thu May 21, 2020 3:52 pm My worthless opinion is that the S&P 500 should not be higher than last October, when the unemployment rate was 3.6% and there was no pandemic. Yet here we are. Perhaps people are betting that the government simply won't allow the market to crash. In which case, earnings don't really matter and yes, FOMO takes total control.
The companies steering the S&P 500 continue to do exceptionally well: Amazon, Apple, Netflix, Facebook, Google, Microsoft, Visa, for example. This extreme concentration makes a big difference in my opinion when we try to draw analogies between the economy as a whole and the performance of the S&P 500. Recession or not, these 7 companies are just so pervasive it seems they will return significant profits in virtually any economic scenario. Call me bullish, but I think it's reasonable to wonder whether 25% of the value of the S&P 500 may be recession proof.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
sycamore
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Re: Who's right about the future? Stock or Bond market?

Post by sycamore »

I would question the premise of the OP question. Maybe the stock and bond markets are not making projections about the future. Lots of market participants do not actually think "well if I invest in the market now it means that I accept premise #1 and therefore outcome #2 and blah blah" or "I project the future holds this so I will sell or buy". They're investing money every paycheck not because they're voting on how things will be in 6 or 12 or 60 months. They know there are short- and long-term ups and downs and they invest regardless. To be sure, there's probably an underlying vote of optimism if you're in the stock market. But maybe the stock market participants are biased that way, and bond market participants are biased against optimism?

Or maybe the markets are making projections but the projects are about different things. Stock market is projecting what happens to publicly traded companies, not the many mom-n-pop stores that will have to close shop because of CoronaVirus. Bond market is projecting what happens to many other things beyond what the stock market focuses on (i.e., on private and public companies, federal and state governments).

And what about the real estate market? What's it projecting?

Good topic, but I think there's just as much noise as signal in the market messages :)
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fredflinstone
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Re: Who's right about the future? Stock or Bond market?

Post by fredflinstone »

Maybe the future is stagflation, in which case both markets would be wrong.
bigskyguy
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Re: Who's right about the future? Stock or Bond market?

Post by bigskyguy »

The only reasonable or logical conclusion that makes any sense to me is that both the stock and the bond markets are preparing for low single digit to zero nominal and negative real returns over decades. I have tended to focus upon bond yields and stock prices when investing. However, if one focuses on bond yields and stock returns as essentially the same metric, and bond prices and stock prices as the same metric, then what we are seeing is low returns for both equities and fixed income investments going forward. The direct result is rising stock and bond prices. Bonds returns have been depressed for years, now stock returns (earnings) are following. What is being markedly destroyed is the equity risk premium. I interpret the Fed and Treasury as saying that nearly no publicly traded company will be allowed to fail. Since nothing is to be subject to market failure, nothing should return a risk premium. If my perspective is at all correct, the market response makes perfect sense. As long as the Fed and Treasury continue to prop up equity and fixed investments, effectively cancelling risk, why should we expect anything else than expensive equities and fixed income instruments with markedly suppressed returns. Negative market forces are defanged. If markets failures are effectively eliminated, market returns will of necessity be depressed. No risk, no return. Seems logical.
Not so for small business America, which has very little access to our investing dollars, and markedly little Fed or Treasury support in the bailout, and those who work for these companies. Big risk investing in your local neighborhood bakery or restaurant, or small business.
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Re: Who's right about the future? Stock or Bond market?

Post by reln »

garlandwhizzer wrote: Thu May 21, 2020 3:39 pm Stocks have re-traced over 60+% of their losses in this bear market. Stocks rose almost as quickly as the sudden drastic decline itself. Equity markets are a forward discounting mechanism and it seems to be telling us that in 6 - 12 months both the equity market and the economy are going to be much stronger than today, getting back much closer to "normal." The stock market surge seems IMO to be driven FOMO (fear of missing out) on the next the bull market which some believe has already started. The bond market on the other hand is trading at levels that suggest a very dim view of the economic growth future and little or no inflation for decades.

FED policy can control short term interest rates, but not long term rates. Long term rates are based on bond market investor's perceptions of long term economic growth and long term inflation. The lowest long term rates in history which we have now suggests that bond investors expect very muted economic growth and little or no inflation for multiple decades. The recent and current demand for 30 year Treasuries has driven their rates from low to ridiculously low at present (1.43%), levels that have never been seen before. So equity investors are rushing to get in on the next bull market while bond investors seem to be preparing for what happened to Japan starting in 1990 and lasting 30 years. Who's right?

Perhaps both are to some degree. Bond investors are preparing for a stagnant economic future with possible negative rates while stock investors are figuring that even if inflation and economic growth remain low for decades, stocks will still outperform bonds long term. Currently the S&P 500 yields more than a half percent higher than the 30 year Treasury and both are considerably lower than their long term average yields. I don't think the fabulous long term backtesting results for a 60/40 portfolio are going to replay quite as well for future expected returns. Hope I'm wrong.

Garland Whizzer
Fed is now influential on long term rates.
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SimpleGift
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Re: Who's right about the future? Stock or Bond market?

Post by SimpleGift »

garlandwhizzer wrote: Thu May 21, 2020 3:39 pm Bond investors are preparing for a stagnant economic future with possible negative rates, while stock investors are figuring that even if inflation and economic growth remain low for decades, stocks will still outperform...
Isn't this what's been going on for several decades now? The yields on long-term bonds in all developed countries have been falling for years, global economic growth has been decelerating, and all the while U.S. stocks have been making great gains.

The expectation might be that at some point the decline in global economic growth (driven by demographic and other secular trends) would catch up with the U.S. stock market. But somehow, the leading U.S. companies just seem to be getting larger, more concentrated in their industries, and more profitable.

One wonders how long these large U.S. companies can defy the decelerating global economic growth trends?
Last edited by SimpleGift on Thu May 21, 2020 6:09 pm, edited 1 time in total.
Grt2bOutdoors
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Re: Who's right about the future? Stock or Bond market?

Post by Grt2bOutdoors »

Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
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Re: Who's right about the future? Stock or Bond market?

Post by Wanderingwheelz »

bigskyguy wrote: Thu May 21, 2020 5:56 pm The only reasonable or logical conclusion that makes any sense to me is that both the stock and the bond markets are preparing for low single digit to zero nominal and negative real returns over decades. I have tended to focus upon bond yields and stock prices when investing. However, if one focuses on bond yields and stock returns as essentially the same metric, and bond prices and stock prices as the same metric, then what we are seeing is low returns for both equities and fixed income investments going forward. The direct result is rising stock and bond prices. Bonds returns have been depressed for years, now stock returns (earnings) are following. What is being markedly destroyed is the equity risk premium. I interpret the Fed and Treasury as saying that nearly no publicly traded company will be allowed to fail. Since nothing is to be subject to market failure, nothing should return a risk premium. If my perspective is at all correct, the market response makes perfect sense. As long as the Fed and Treasury continue to prop up equity and fixed investments, effectively cancelling risk, why should we expect anything else than expensive equities and fixed income instruments with markedly suppressed returns. Negative market forces are defanged. If markets failures are effectively eliminated, market returns will of necessity be depressed. No risk, no return. Seems logical.
Not so for small business America, which has very little access to our investing dollars, and markedly little Fed or Treasury support in the bailout, and those who work for these companies. Big risk investing in your local neighborhood bakery or restaurant, or small business.
I feel really bad for hard working business owners who do not have substantial investments in public market companies. It’s incredibly unjust that public companies have essentially been given a government backstop against failure while mostly small private companies are left to suffer whatever fate the crummy current conditions dole out.

Why are more people not outraged by this? I fear it’s becomes there aren’t too many people who know a business owner well, let alone being one himself.
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Re: Who's right about the future? Stock or Bond market?

Post by Stinky »

bigskyguy wrote: Thu May 21, 2020 5:56 pm The only reasonable or logical conclusion that makes any sense to me is that both the stock and the bond markets are preparing for low single digit to zero nominal and negative real returns over decades. I have tended to focus upon bond yields and stock prices when investing. However, if one focuses on bond yields and stock returns as essentially the same metric, and bond prices and stock prices as the same metric, then what we are seeing is low returns for both equities and fixed income investments going forward. The direct result is rising stock and bond prices. Bonds returns have been depressed for years, now stock returns (earnings) are following. What is being markedly destroyed is the equity risk premium. I interpret the Fed and Treasury as saying that nearly no publicly traded company will be allowed to fail. Since nothing is to be subject to market failure, nothing should return a risk premium. If my perspective is at all correct, the market response makes perfect sense. As long as the Fed and Treasury continue to prop up equity and fixed investments, effectively cancelling risk, why should we expect anything else than expensive equities and fixed income instruments with markedly suppressed returns. Negative market forces are defanged. If markets failures are effectively eliminated, market returns will of necessity be depressed. No risk, no return. Seems logical.
Not so for small business America, which has very little access to our investing dollars, and markedly little Fed or Treasury support in the bailout, and those who work for these companies. Big risk investing in your local neighborhood bakery or restaurant, or small business.
Good, well reasoned answer.
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Wanderingwheelz
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Re: Who's right about the future? Stock or Bond market?

Post by Wanderingwheelz »

SimpleGift wrote: Thu May 21, 2020 6:02 pm
garlandwhizzer wrote: Thu May 21, 2020 3:39 pm Bond investors are preparing for a stagnant economic future with possible negative rates, while stock investors are figuring that even if inflation and economic growth remain low for decades, stocks will still outperform...
Isn't this what's been going on for several decades now? The yields on long-term bonds in all developed countries have been falling for years, global economic growth has been decelerating, and all the while U.S. stocks have been making great gains.

The expectation might be that at some point the decline in global economic growth (driven by demographic and other secular trends) would catch up with the U.S. stock market. But somehow, the leading U.S. companies just seem to be getting larger, more concentrated in their industries, and more profitable.

One wonders how long these large U.S. companies can defy the decelerating global economic growth trends?
The concentration at the top of the S&P can’t go on like it is without problems. For one thing, by smaller companies being eliminated or seriously frustrated in their efforts to gain market share, those are potential customers for the larger companies- but they’re being eliminated. Also, as these mostly tech monopolies get larger and larger the business partners they need end up being their competitors and that can cause big problems like the one Google is having with its cloud component. It’s second rate, but they don’t want to give a massive cloud service contract to one or their main competitors in other aspects of its business.

To a much lesser degree Amazon has hundreds of thousands of potential customers they will need to grow, but many of those people would never use Amazon because their business practices are so ruthless and anticompetitive that they don’t want to support their growth.
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Re: Who's right about the future? Stock or Bond market?

Post by SimpleGift »

Wanderingwheelz wrote: Thu May 21, 2020 7:27 pm The concentration at the top of the S&P can’t go on like it is without problems. For one thing, by smaller companies being eliminated or seriously frustrated in their efforts to gain market share, those are potential customers for the larger companies- but they’re being eliminated.
Appreciate your insights. This issue of company concentration is an interesting one. Due to fewer IPOs and delistings, U.S. public firms today are far different compared with 1975 or even 1995. They are fewer, larger, older and their profits, assets and payouts are much more concentrated in a smaller group of companies (table below).
  • Image
    NOTE: Statistics are for all publicly-listed U.S. companies. Source: Kahle & Sturz.
It makes one wonder what the long-term impacts of this increasing concentration will be in the decades ahead.
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Re: Who's right about the future? Stock or Bond market?

Post by mindboggling »

Split the difference and buy some of both.
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Re: Who's right about the future? Stock or Bond market?

Post by palanzo »

Grt2bOutdoors wrote: Thu May 21, 2020 6:06 pm Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
Precisely? Hertz as a AAA rating?
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Re: Who's right about the future? Stock or Bond market?

Post by whodidntante »

Wanderingwheelz wrote: Thu May 21, 2020 7:27 pm To a much lesser degree Amazon has hundreds of thousands of potential customers they will need to grow, but many of those people would never use Amazon because their business practices are so ruthless and anticompetitive that they don’t want to support their growth.
I too predict that we will feast upon their brains with fava beans and a nice chianti. But the tech giants could fly pretty high before that happens. Look on the bright side. It'll be fun watching the Bogleheads explain that a portfolio that's half invested in four stocks is "diversified."
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Re: Who's right about the future? Stock or Bond market?

Post by 2pedals »

palanzo wrote: Thu May 21, 2020 7:58 pm
Grt2bOutdoors wrote: Thu May 21, 2020 6:06 pm Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
Precisely? Hertz as a AAA rating?
Hertz has discounts for AAA members. :twisted:
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Re: Who's right about the future? Stock or Bond market?

Post by geerhardusvos »

whodidntante wrote: Thu May 21, 2020 8:24 pm
Wanderingwheelz wrote: Thu May 21, 2020 7:27 pm To a much lesser degree Amazon has hundreds of thousands of potential customers they will need to grow, but many of those people would never use Amazon because their business practices are so ruthless and anticompetitive that they don’t want to support their growth.
I too predict that we will feast upon their brains with fava beans and a nice chianti. But the tech giants could fly pretty high before that happens. Look on the bright side. It'll be fun watching the Bogleheads explain that a portfolio that's half invested in four stocks is "diversified."
If those big companies get to that point of 50% of the portfolio, we will be very rich people. Just remember to keep rebalancing :beer
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Re: Who's right about the future? Stock or Bond market?

Post by whodidntante »

geerhardusvos wrote: Thu May 21, 2020 9:04 pm
whodidntante wrote: Thu May 21, 2020 8:24 pm
Wanderingwheelz wrote: Thu May 21, 2020 7:27 pm To a much lesser degree Amazon has hundreds of thousands of potential customers they will need to grow, but many of those people would never use Amazon because their business practices are so ruthless and anticompetitive that they don’t want to support their growth.
I too predict that we will feast upon their brains with fava beans and a nice chianti. But the tech giants could fly pretty high before that happens. Look on the bright side. It'll be fun watching the Bogleheads explain that a portfolio that's half invested in four stocks is "diversified."
If those big companies get to that point of 50% of the portfolio, we will be very rich people. Just remember to keep rebalancing :beer
^ See what I mean? :P
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Re: Who's right about the future? Stock or Bond market?

Post by SovereignInvestor »

yohac wrote: Thu May 21, 2020 3:52 pm My worthless opinion is that the S&P 500 should not be higher than last October, when the unemployment rate was 3.6% and there was no pandemic. Yet here we are. Perhaps people are betting that the government simply won't allow the market to crash. In which case, earnings don't really matter and yes, FOMO takes total control.
Agree. But devils advocate is that last October we didn't know the fed can and will unleash endless QE to fight any shock. I mean that is a massive put option. The S&P is becoming like a FOMC insured savings account. To the extent that is the case the risk premium may need to decrease.
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Re: Who's right about the future? Stock or Bond market?

Post by Grt2bOutdoors »

palanzo wrote: Thu May 21, 2020 7:58 pm
Grt2bOutdoors wrote: Thu May 21, 2020 6:06 pm Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
Precisely? Hertz as a AAA rating?
The AAA rating was based on underlying collateral with a significant coverage ratio above and beyond the notes principal and interest payments over the life of the loan. That said, the type of collateral should never have been given an A rating especially since the collateral sharply deteriorates when the ultimate source of the repayments has no liquidity and/or confidence to consummate deals. That is credit training 101 -but it is a lost science as those rating agencies have two masters - their owners and the issuers who pay them for the ratings. The investor had better do their homework, carefully.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
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Re: Who's right about the future? Stock or Bond market?

Post by Grt2bOutdoors »

2pedals wrote: Thu May 21, 2020 8:38 pm
palanzo wrote: Thu May 21, 2020 7:58 pm
Grt2bOutdoors wrote: Thu May 21, 2020 6:06 pm Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
Precisely? Hertz as a AAA rating?
Hertz has discounts for AAA members. :twisted:
Yes, they will be getting 10 cents......for every dollar they’ve paid for their membership! :twisted:
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Re: Who's right about the future? Stock or Bond market?

Post by palanzo »

Grt2bOutdoors wrote: Fri May 22, 2020 12:06 am
palanzo wrote: Thu May 21, 2020 7:58 pm
Grt2bOutdoors wrote: Thu May 21, 2020 6:06 pm Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
Precisely? Hertz as a AAA rating?
The AAA rating was based on underlying collateral with a significant coverage ratio above and beyond the notes principal and interest payments over the life of the loan. That said, the type of collateral should never have been given an A rating especially since the collateral sharply deteriorates when the ultimate source of the repayments has no liquidity and/or confidence to consummate deals. That is credit training 101 -but it is a lost science as those rating agencies have two masters - their owners and the issuers who pay them for the ratings. The investor had better do their homework, carefully.
And I thought that was the job of the rating agencies? If you take a look at the asset backed bonds you will find there a lots of them with "when the ultimate source of the repayments has no liquidity and/or confidence to consummate deals"

Just like 2008 all over. Why does anyone believe in ratings of the agencies?

So what should we believe about the bonds in Vanguard bond funds? Should I do my home work on every bond?
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Re: Who's right about the future? Stock or Bond market?

Post by palanzo »

Grt2bOutdoors wrote: Fri May 22, 2020 12:09 am
2pedals wrote: Thu May 21, 2020 8:38 pm
palanzo wrote: Thu May 21, 2020 7:58 pm
Grt2bOutdoors wrote: Thu May 21, 2020 6:06 pm Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
Precisely? Hertz as a AAA rating?
Hertz has discounts for AAA members. :twisted:
Yes, they will be getting 10 cents......for every dollar they’ve paid for their membership! :twisted:
Remember those bonds are in Total Bond and other Vanguard funds.
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Re: Who's right about the future? Stock or Bond market?

Post by DonIce »

garlandwhizzer wrote: Thu May 21, 2020 3:39 pm Stocks have re-traced over 60+% of their losses in this bear market. Stocks rose almost as quickly as the sudden drastic decline itself. Equity markets are a forward discounting mechanism and it seems to be telling us that in 6 - 12 months both the equity market and the economy are going to be much stronger than today, getting back much closer to "normal." The stock market surge seems IMO to be driven FOMO (fear of missing out) on the next the bull market which some believe has already started. The bond market on the other hand is trading at levels that suggest a very dim view of the economic growth future and little or no inflation for decades.

FED policy can control short term interest rates, but not long term rates. Long term rates are based on bond market investor's perceptions of long term economic growth and long term inflation. The lowest long term rates in history which we have now suggests that bond investors expect very muted economic growth and little or no inflation for multiple decades. The recent and current demand for 30 year Treasuries has driven their rates from low to ridiculously low at present (1.43%), levels that have never been seen before. So equity investors are rushing to get in on the next bull market while bond investors seem to be preparing for what happened to Japan starting in 1990 and lasting 30 years. Who's right?

Perhaps both are to some degree. Bond investors are preparing for a stagnant economic future with possible negative rates while stock investors are figuring that even if inflation and economic growth remain low for decades, stocks will still outperform bonds long term. Currently the S&P 500 yields more than a half percent higher than the 30 year Treasury and both are considerably lower than their long term average yields. I don't think the fabulous long term backtesting results for a 60/40 portfolio are going to replay quite as well for future expected returns. Hope I'm wrong.

Garland Whizzer
Actually the fed can control the entire yield curve, not just short term rates. They can buy and/or sell whatever amount of all dates of treasuries to shape the yield curve to be whatever they want it to be.

No one is right about the future. Bond prices tomorrow will be different than they are today, and so will stock prices. Meaning that today's predictions will already be outdated by tomorrow.
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Re: Who's right about the future? Stock or Bond market?

Post by Valuethinker »

SovereignInvestor wrote: Thu May 21, 2020 10:49 pm
yohac wrote: Thu May 21, 2020 3:52 pm My worthless opinion is that the S&P 500 should not be higher than last October, when the unemployment rate was 3.6% and there was no pandemic. Yet here we are. Perhaps people are betting that the government simply won't allow the market to crash. In which case, earnings don't really matter and yes, FOMO takes total control.
Agree. But devils advocate is that last October we didn't know the fed can and will unleash endless QE to fight any shock. I mean that is a massive put option. The S&P is becoming like a FOMC insured savings account. To the extent that is the case the risk premium may need to decrease.
Remember "the Greenspan Put"? There was this presumption we could never have another bear market, because Alan Greenspan would cut interest rates to prevent it. After the end of the Millennium (technically 2001 but everyone took it as 2000) we discovered that yes, indeed, we could have a bear market which ran for nearly 3 years.
The S&P is becoming like a FOMC insured savings account
Those words sent a chill down my spine.

It's a lovely turn of phrase, but it cannot be true. By definition equities are about risk.

The strength of the market has surprised me, and seems to be signalling that the US economy will be in a much better place 9-18 months out (in my experience, the typical time horizon of investors and analysts estimating earnings with any accuracy/ credibility). But there are huge unknowns in that: whether we experience a "second wave"; progress towards useful anti virals; prospects for the vaccine; success of Test, Trace & Isolate strategies in the major economies; just how robust the economic recoveries are*. The fact that Denmark is opening up, but Sweden's crisis is worsening, just doesn't tell you much - the countries are too small.

In other words, I don't think any amount of Central Bank buying can beat new bad news. The market has digested the bad news so far and is now looking forward towards a recovery.

* in a world where we wear masks on half empty planes, retail, entertainment and food venues observe 6' distancing, etc. etc.
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Re: Who's right about the future? Stock or Bond market?

Post by 22twain »

Valuethinker wrote: Fri May 22, 2020 3:37 am * in a world where we wear masks on half empty planes, retail, entertainment and food venues observe 6' distancing, etc. etc.
...and where we have tens of thousands of people dying per month (in the US alone) that weren't dying before all this started.
Last edited by 22twain on Fri May 22, 2020 6:39 am, edited 2 times in total.
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Wanderingwheelz
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Re: Who's right about the future? Stock or Bond market?

Post by Wanderingwheelz »

whodidntante wrote: Thu May 21, 2020 8:24 pm
Wanderingwheelz wrote: Thu May 21, 2020 7:27 pm To a much lesser degree Amazon has hundreds of thousands of potential customers they will need to grow, but many of those people would never use Amazon because their business practices are so ruthless and anticompetitive that they don’t want to support their growth.
I too predict that we will feast upon their brains with fava beans and a nice chianti. But the tech giants could fly pretty high before that happens. Look on the bright side. It'll be fun watching the Bogleheads explain that a portfolio that's half invested in four stocks is "diversified."
Agreed. The case for small cap value is getting stronger and stronger with each passing week, this year. VTI or VOO are still the place to have most of your stock allocation, but they’re turning into something they were never intended to be.
Being wrong compounds forever.
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midareff
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Re: Who's right about the future? Stock or Bond market?

Post by midareff »

I prefer to stay closer to 50/50 since I know "nobody knows nothing", and that sure includes me.
Valuethinker
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Re: Who's right about the future? Stock or Bond market?

Post by Valuethinker »

22twain wrote: Fri May 22, 2020 6:04 am
Valuethinker wrote: Fri May 22, 2020 3:37 am * in a world where we wear masks on half empty planes, retail, entertainment and food venues observe 6' distancing, etc. etc.
...and where we have tens of thousands of people dying per month (in the US alone) that weren't dying before all this started.
There's a group of outlier countries - the US & the UK among them - let's put it that way. Most other developed nations are further along towards "crushing the curve". But there have been second waves in places like Singapore and China, which have forced new lock-downs.

It's not the people who actually die, because their assets presumably get recycled into the hands of heirs who then spend some of that wealth, stimulating demand. With notable exceptions, they are not the most productive people in the economy - we have not lost too many Apple designers, yet, say. (This is not to devalue their lives in terms of what they meant as human beings; we've been personally affected by this tragedy and may be about to be so, again). If you contrast this to the 1918 Flu, which killed young adults in particular, that's a big difference.

It's the effect on the rest of us, who cease to do certain actions because we (legitimately) fear catching the disease and being damaged or dying. My spouse has a colleague in his 30s who caught it nearly at the beginning of the wave, and he's still not right. Had to move back in with his parents, is not able to work full time, etc. My spouse and I are in far higher risk groups.
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Re: Who's right about the future? Stock or Bond market?

Post by Nowizard »

Two issues: 1. The stock market and economy are not the same; 2. The federal government has a strong tendency to financially support corporations more than individuals during financial crises. In the current case for example, corporations are obtaining assistance prior to even reporting financial setbacks. With that approach, if it continues, one can anticipate that corporations will do better, or at least sooner, than individuals. No assurance of that, definitely not in six months, but the long range outlook always looks positive for prudent investors who are not overly distracted by the short term.

Tim
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AnalogKid22
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Re: Who's right about the future? Stock or Bond market?

Post by AnalogKid22 »

Nowizard wrote: Fri May 22, 2020 8:03 am Two issues: 1. The stock market and economy are not the same; 2. The federal government has a strong tendency to financially support corporations more than individuals during financial crises. In the current case for example, corporations are obtaining assistance prior to even reporting financial setbacks. With that approach, if it continues, one can anticipate that corporations will do better, or at least sooner, than individuals. No assurance of that, definitely not in six months, but the long range outlook always looks positive for prudent investors who are not overly distracted by the short term.

Tim
So true. Just look at the real estate bailout in 2008: "Here's hundreds of billions of (tax) dollars to attempt to fix the situation. We know you'll do the right thing." The rich get richer.
Robot Monster
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Re: Who's right about the future? Stock or Bond market?

Post by Robot Monster »

whereskyle wrote: Thu May 21, 2020 4:06 pm
yohac wrote: Thu May 21, 2020 3:52 pm My worthless opinion is that the S&P 500 should not be higher than last October, when the unemployment rate was 3.6% and there was no pandemic. Yet here we are. Perhaps people are betting that the government simply won't allow the market to crash. In which case, earnings don't really matter and yes, FOMO takes total control.
The companies steering the S&P 500 continue to do exceptionally well: Amazon, Apple, Netflix, Facebook, Google, Microsoft, Visa, for example. This extreme concentration makes a big difference in my opinion when we try to draw analogies between the economy as a whole and the performance of the S&P 500. Recession or not, these 7 companies are just so pervasive it seems they will return significant profits in virtually any economic scenario. Call me bullish, but I think it's reasonable to wonder whether 25% of the value of the S&P 500 may be recession proof.
On that theme, "BofA with the factoid of the day: 2215 out of 3042 stocks remain in a bear market, down 20% from their all-time highs.". From Robert Burgess's Twitter feed.
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Re: Who's right about the future? Stock or Bond market?

Post by whereskyle »

bigskyguy wrote: Thu May 21, 2020 5:56 pm The only reasonable or logical conclusion that makes any sense to me is that both the stock and the bond markets are preparing for low single digit to zero nominal and negative real returns over decades. I have tended to focus upon bond yields and stock prices when investing. However, if one focuses on bond yields and stock returns as essentially the same metric, and bond prices and stock prices as the same metric, then what we are seeing is low returns for both equities and fixed income investments going forward. The direct result is rising stock and bond prices. Bonds returns have been depressed for years, now stock returns (earnings) are following. What is being markedly destroyed is the equity risk premium. I interpret the Fed and Treasury as saying that nearly no publicly traded company will be allowed to fail. Since nothing is to be subject to market failure, nothing should return a risk premium. If my perspective is at all correct, the market response makes perfect sense. As long as the Fed and Treasury continue to prop up equity and fixed investments, effectively cancelling risk, why should we expect anything else than expensive equities and fixed income instruments with markedly suppressed returns. Negative market forces are defanged. If markets failures are effectively eliminated, market returns will of necessity be depressed. No risk, no return. Seems logical.
Not so for small business America, which has very little access to our investing dollars, and markedly little Fed or Treasury support in the bailout, and those who work for these companies. Big risk investing in your local neighborhood bakery or restaurant, or small business.
The point is well taken, but I have been thinking a lot about risk lately, and, regardless of fed intervention, it seems there is just as much behavioral risk in the stock market as ever. If I remember correctly, the fed's announcement that it would take preventative action actually triggered (or at least immediately preceded) much of the covid sell off. Even when investors know that the fed is on its way, uncertainty remains, and sell offs happen. Such events are still incredibly risky. The majority of investors do not idolize Jack Bogle and they do not pride themselves on their ability to take a ride down along with their stocks when an economic meltdown appears on the horizon. As such, even today, when the market twitches, people overreact, and boom, all sorts of investors are selling, erasing gains, and increasing the risk of loss for other investors. This, to me, proves that risk remains in the stock market despite our perceptions.

This particular issue, I think, might be a common problem for Bogleheads. Because we are inspired by a man who advocated a very solid long-term plan for reducing risk in the stock market, we assume that everyone must see it as clearly as we do: if you buy and hold on to a broad, market-cap-weighted index fund for thirty years, virtually all of the risk that you will lose your initial investment is eliminated. From that perspective, it is easy to look at the stock market, and ask, "Where is the risk?" But this forum should be the best evidence one needs that even people who advocate holding during downturns have a very difficult time actually following that advice and end up selling when they should not, erasing much of their gains, or even selling at a loss.

Even though I am extremely confident in the very low risk of my long-term, index-fund based plan, and even though the Fed will continue to take action, I see plenty of risk in the stock market, especially when even Bogleheads can't resist the urge to sell when things look iffy.
"I am better off than he is – for he knows nothing and thinks that he knows. I neither know nor think that I know." - Socrates. "Nobody knows nothing." - Jack Bogle
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garlandwhizzer
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Re: Who's right about the future? Stock or Bond market?

Post by garlandwhizzer »

DonIce wrote:

Actually the fed can control the entire yield curve, not just short term rates. They can buy and/or sell whatever amount of all dates of treasuries to shape the yield curve to be whatever they want it to be.
I suggest reading the following article based Gene Fama's long term research on this subject:

https://www.cfainstitute.org/en/researc ... st-summary

Quote from article:
Abstract
Architect of the efficient market hypothesis and Nobel Laureate, the author investigates the extent to which the Fed’s monetary policy controls short- and long-term interest rates. Evidence suggests that Fed actions with respect to its target rate have little impact on long-term rates, and there is substantial uncertainty about the Fed’s control of short-term rates.

The author concludes that longer-term interest rate behavior would appear to be beyond the control of the Fed.
Short term rates are immediately and directly influenced by the FED's monetary policy. Long term rates are only affected if those short term rate changes produce changes in the market's perception of long term multi-decade economic growth and inflation. If lowering short term rates creates an increased fear of long term inflation which it sometimes did in the past, long term rates would often paradoxically rise, to offset the increased inflation fear which greatly impacts the principal value of long term bonds. IMO the reason long term Treasury rates are so low now is much less FED policy and QE than a combination of a flight to safety in a bear market/recession and the fact that the market almost entirely discounts the possibility of robust economic growth/inflation in the future.

Garland Whizzer
IndexCore
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Re: Who's right about the future? Stock or Bond market?

Post by IndexCore »

As of Apr 30, the total stock market was down just -1% over the past 12 months (compared to April 30, 2019). While it's even higher now, I'll be using Vanguard data which only shows data as of Apr 30, 2019. It's odd to think of a global pandemic as having a mere -1% impact over 12 months. Does the stock market really say there's nothing to worry about?

Maybe it's better to break the stock market up into it's 11 component sectors, like tech and real estate, to see how they performed individually.
https://investor.vanguard.com/etf/list? ... nd-returns

Tech is 1/4th of the US stock market (!) and I'll lump in telecommunications (1/50th, -0.6%) as well. Tech gained +14.8% which lifts the overall market +3.7%. Most people are stuck at home, depending on technology. For tech companies, the current situation actually benefits them.

Health care is 1/7th of the market, and it's importance is obvious during the pandemic. The sector is up +14.1%, or about a +2% lift to the whole market.

The good news mostly ends with those two sectors, which make up 2/5ths of the U.S. stock market.
The worst hit is energy, which lost -41% in 12 months. But being 1/33rd of the market, the impact is closer to -1.3% when spread out.

The financial sector makes up 1/6th of the market, and spreading it's -18% loss out would translate to -3% for the overall market.

To roughly summarize: tech (+3.7%), health (+2%), energy (-1.3%), financial (-3%) together make up 3/5ths of the market, and provide a +2.4% overall lift to the market. Lots of bad news in other areas drag performance down further.

The consumer discretionary and staples sectors account for 22% of the market, but only had -1% to -2% losses in 12 months. This is one of the stranger aspects, that retail stores were mostly not open for business at the end of April, but their stock prices were only down about -1.5%. Well, spread that over the whole market and it's only a -0.3% impact.

Industrials (1/9) and materials (1/50th) took losses of -16% and -10.8% over the year ended Apr 30, 2020. Materials is a rounding error, but industrials contributes a -1.8% overall drop. The contrast to consumer sectors is a bit striking.

Finally, utilities (1/33) which I didn't lump with anything else, but only lost -1%. Kind of a rounding error for the overall market.

Maybe I rounded off too many times, as I get a +0.3% overall stock market return for 12 months. The contributions of tech and health care make sense, while consumer sectors being only -1% to -2% impacted makes the least sense. I think it's those two sectors that are hiding the most damage, and most uncertainty.
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Re: Who's right about the future? Stock or Bond market?

Post by Broken Man 1999 »

mindboggling wrote: Thu May 21, 2020 7:54 pm Split the difference and buy some of both.
50/50 AA works for us. We have been there for a few years. Easy to determine which side to withdraw from for expenses as needed.

Very easy to rebalance, especially for a lazy person.

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Re: Who's right about the future? Stock or Bond market?

Post by Alchemist »

garlandwhizzer wrote: Thu May 21, 2020 3:39 pm Perhaps both are to some degree. Bond investors are preparing for a stagnant economic future with possible negative rates while stock investors are figuring that even if inflation and economic growth remain low for decades, stocks will still outperform bonds long term. Currently the S&P 500 yields more than a half percent higher than the 30 year Treasury and both are considerably lower than their long term average yields. I don't think the fabulous long term backtesting results for a 60/40 portfolio are going to replay quite as well for future expected returns. Hope I'm wrong.

Garland Whizzer
Let me propose a different, non-EMH idea.

The bond market does not now, nor is it ever really pricing the next 30 years of economic growth and inflation. Instead what is going on is the market is displaying a hedged bet.

The equity market price shows that over the next 12 months there is confidence in two things:

1) A Vaccine will be in production before the end of 2020

2) Fed and Congressional support actions will be sufficient to keep the economy on life support until the vaccine arrives

Since we do not have anyway of knowing for sure if the above things are true; many investors are hedging with 30 year treasuries. If Moderna and Oxford fail their phase 3 trials then the equity market will crater and the treasury market will rally. Thus going long on the duration curve provides insurance against the vaccine effort failing/taking longer than hoped.

That is why LTT's are yielding so little. High demand because investors want the hedge against another equity collapse in the fall. It has *nothing* to do with what inflation or growth will be in 2050.

For support of this idea I just need to point to how terrible the bond market actually is at predicting long-term economic trends. After all, long term bond investors have been consistently wrong for the last half century. First with rates far too low in the 1970s, then drastically overshooting and being completely wrong about forward 30 year inflation during the 1980's. Hence the amazing LTT bull market over the last 30 years.

LTT price/yield is determined by short term market expectations and not long term ones. Market is pretty good with 1-5 year treasury rate predictions and terrible at anything beyond that. So either bond market investors are idiots, or they are not doing what EMH proponents think they are doing.
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Re: Who's right about the future? Stock or Bond market?

Post by WolfgangPauli »

The problem is this market is all about the Fed. Many articles have now been written (and cannot wait for "Margin Call Part Deux" to come out as a movie) about the actions of the Fed in Mid March and continuing now. They are buying corporate bonds (including hi yield), treasuries and everything in between. So, you cannot predict anything right now using economics and math because Jay Powell has said he will do anything and everything to save the market.

What this means is stick to your allocation (whatever is right for you) and "Stay the Course". Unless you have an "in" on what Powell is going to do, stick to your plan.

Image

As you can see from this the Fed balance sheet is now over $7 Trillion dollars and it is straight up.
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TechGuy365
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Re: Who's right about the future? Stock or Bond market?

Post by TechGuy365 »

IndexCore wrote: Fri May 22, 2020 3:01 pm As of Apr 30, the total stock market was down just -1% over the past 12 months (compared to April 30, 2019). While it's even higher now, I'll be using Vanguard data which only shows data as of Apr 30, 2019. It's odd to think of a global pandemic as having a mere -1% impact over 12 months. Does the stock market really say there's nothing to worry about?

Maybe it's better to break the stock market up into it's 11 component sectors, like tech and real estate, to see how they performed individually.
https://investor.vanguard.com/etf/list? ... nd-returns

Tech is 1/4th of the US stock market (!) and I'll lump in telecommunications (1/50th, -0.6%) as well. Tech gained +14.8% which lifts the overall market +3.7%. Most people are stuck at home, depending on technology. For tech companies, the current situation actually benefits them.

Health care is 1/7th of the market, and it's importance is obvious during the pandemic. The sector is up +14.1%, or about a +2% lift to the whole market.

The good news mostly ends with those two sectors, which make up 2/5ths of the U.S. stock market.
The worst hit is energy, which lost -41% in 12 months. But being 1/33rd of the market, the impact is closer to -1.3% when spread out.

The financial sector makes up 1/6th of the market, and spreading it's -18% loss out would translate to -3% for the overall market.

To roughly summarize: tech (+3.7%), health (+2%), energy (-1.3%), financial (-3%) together make up 3/5ths of the market, and provide a +2.4% overall lift to the market. Lots of bad news in other areas drag performance down further.

The consumer discretionary and staples sectors account for 22% of the market, but only had -1% to -2% losses in 12 months. This is one of the stranger aspects, that retail stores were mostly not open for business at the end of April, but their stock prices were only down about -1.5%. Well, spread that over the whole market and it's only a -0.3% impact.

Industrials (1/9) and materials (1/50th) took losses of -16% and -10.8% over the year ended Apr 30, 2020. Materials is a rounding error, but industrials contributes a -1.8% overall drop. The contrast to consumer sectors is a bit striking.

Finally, utilities (1/33) which I didn't lump with anything else, but only lost -1%. Kind of a rounding error for the overall market.

Maybe I rounded off too many times, as I get a +0.3% overall stock market return for 12 months. The contributions of tech and health care make sense, while consumer sectors being only -1% to -2% impacted makes the least sense. I think it's those two sectors that are hiding the most damage, and most uncertainty.
Thanks for the great analysis. Here is an interesting visual of what you're describing. Numbers varies somewhat but it tells a similar story:

https://finviz.com/map.ashx?t=sec&st=w52

and

https://finviz.com/groups.ashx

I don't see the picture changing any time soon. Large tech will still carry much of market for the foreseeable future. They have strong balance sheets and large amount of cash on hand ($50B to $250B) to weather through the storm. They came out of CYQ1 healthy with relatively few layoffs. A few stocks even hitting their ATH.
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Re: Who's right about the future? Stock or Bond market?

Post by pascalwager »

yohac wrote: Thu May 21, 2020 3:52 pm My worthless opinion is that the S&P 500 should not be higher than last October, when the unemployment rate was 3.6% and there was no pandemic. Yet here we are. Perhaps people are betting that the government simply won't allow the market to crash. In which case, earnings don't really matter and yes, FOMO takes total control.
When you say "people", do you mean PhD's in finance and math who do most of the trading for big investment banks, etc. It's my understanding that retail investors like us own a trivial piece of the markets.
anoop
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Re: Who's right about the future? Stock or Bond market?

Post by anoop »

https://twitter.com/RaoulGMI/status/1263939087209291776
Almost everything I read says the bond market is right. But now with the fed buying every, that may be broke too.
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market timer
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Re: Who's right about the future? Stock or Bond market?

Post by market timer »

Markets are telling us growth and inflation are likely to be low for a generation. Long term real yields are as low as they have ever been. A lower discount rate makes all future cash flows worth more today: stocks, bonds, real estate, annuities, pensions, etc. All we can do is adjust expectations accordingly, and don't be surprised if improving growth prospects leads to a sell-off in both stocks and bonds.

Image
jajlrajrf
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Re: Who's right about the future? Stock or Bond market?

Post by jajlrajrf »

Wanderingwheelz wrote: Fri May 22, 2020 6:17 am
Agreed. The case for small cap value is getting stronger and stronger with each passing week, this year.
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Re: Who's right about the future? Stock or Bond market?

Post by columbia »

jajlrajrf wrote: Sat May 23, 2020 9:27 am
Wanderingwheelz wrote: Fri May 22, 2020 6:17 am
Agreed. The case for small cap value is getting stronger and stronger with each passing week, this year.
"This will finally be the year of Linux on the desktop!"
I am running Debian on a formerly dead iMac...
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SimpleGift
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Re: Who's right about the future? Stock or Bond market?

Post by SimpleGift »

market timer wrote: Sat May 23, 2020 1:23 am Markets are telling us growth and inflation are likely to be low for a generation.
Yes. The bond markets, specifically, are simply acknowledging the trend of slowing real GDP growth that has been underway for at least six decades in the developed world (charts below).
  • Image
    Data source: World Bank, showing real GDP growth rates in constant 2010 U.S. dollars.
To see rapid growth in the years ahead, with rising inflation and interest rates, one needs to imagine that the root causes of this decades-long slowdown in GDP growth — i.e., falling birth rates, aging populations, the shift from goods to service industries, etc. — will somehow magically reverse. It's about as likely as the Earth changing its course around the Sun.

The challenge ahead for stock markets and corporate enterprise in general will be how to increase earnings in a world of sluggish and decelerating GDP growth. Outside of the emerging market economies, this may prove increasingly difficult to accomplish in the decades to come.
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Re: Who's right about the future? Stock or Bond market?

Post by IndexCore »

market timer wrote: Sat May 23, 2020 1:23 am Markets are telling us growth and inflation are likely to be low for a generation.
I wouldn't use the word "likely"... Studies I read showed future returns are only 0.4 correlated with price/earnings ratio, with other measures showing an even lower correlation.

TechGuy365 wrote: Fri May 22, 2020 9:42 pm
IndexCore wrote: Fri May 22, 2020 3:01 pm As of Apr 30, the total stock market was down just -1% over the past 12 months (compared to April 30, 2019).
...
The contributions of tech and health care make sense, while consumer sectors being only -1% to -2% impacted makes the least sense. I think it's those two sectors that are hiding the most damage, and most uncertainty.
Thanks for the great analysis. Here is an interesting visual of what you're describing. Numbers varies somewhat but it tells a similar story:
https://finviz.com/map.ashx?t=sec&st=w52

and

https://finviz.com/groups.ashx
I don't see the picture changing any time soon. Large tech will still carry much of market for the foreseeable future.
That's really interesting, and matches what I found. But the foreseeable future can change quickly. We might see a massive sell off in big tech if it's announced "Elizabeth Warren will head the Justice Department", since she advocates breaking up Amazon, Google and Facebook into smaller companies.

I think the Fed is making one big blanket insurance policy for the stock and bond markets, which masks the damage. Without knowing who won't be covered by that mask, and how long the mask stays in place, it's hard to tell when reality will hit. I would say both stock and bond markets are distorted for the foreseeable future.
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Re: Who's right about the future? Stock or Bond market?

Post by dkturner »

Grt2bOutdoors wrote: Thu May 21, 2020 6:06 pm Stock market is based on optimism. Bond market is based on rationalism. If you want to know which companies survive, go look at their bonds. Not the bond ratings - ratings are like opinions, everyone has one but their track record shows even they don't call the outcomes precisely.
That’s very good advice. That is why I prefer to have my corporate bonds actively managed. It helps to look under the carpet from time to time to make sure the floor is still in good condition.
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Re: Who's right about the future? Stock or Bond market?

Post by anoop »

IndexCore wrote: Sun May 24, 2020 4:01 am
market timer wrote: Sat May 23, 2020 1:23 am Markets are telling us growth and inflation are likely to be low for a generation.
I wouldn't use the word "likely"... Studies I read showed future returns are only 0.4 correlated with price/earnings ratio, with other measures showing an even lower correlation.

TechGuy365 wrote: Fri May 22, 2020 9:42 pm
IndexCore wrote: Fri May 22, 2020 3:01 pm As of Apr 30, the total stock market was down just -1% over the past 12 months (compared to April 30, 2019).
...
The contributions of tech and health care make sense, while consumer sectors being only -1% to -2% impacted makes the least sense. I think it's those two sectors that are hiding the most damage, and most uncertainty.
Thanks for the great analysis. Here is an interesting visual of what you're describing. Numbers varies somewhat but it tells a similar story:
https://finviz.com/map.ashx?t=sec&st=w52

and

https://finviz.com/groups.ashx
I don't see the picture changing any time soon. Large tech will still carry much of market for the foreseeable future.
That's really interesting, and matches what I found. But the foreseeable future can change quickly. We might see a massive sell off in big tech if it's announced "Elizabeth Warren will head the Justice Department", since she advocates breaking up Amazon, Google and Facebook into smaller companies.

I think the Fed is making one big blanket insurance policy for the stock and bond markets, which masks the damage. Without knowing who won't be covered by that mask, and how long the mask stays in place, it's hard to tell when reality will hit. I would say both stock and bond markets are distorted for the foreseeable future.
The rules of the game say that once the fed decides to use a tool and it works, it must continue to use it in perpetuity or it will stop working. Next time, a different tool will need to be added.
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